CROSS-BORDER DEVELOPMENTS IN AUSTRALIA – AN UPDATE Michael Quinlan, Partner, Allens Arthur Robinson, Sydney, Australia 1. Introduction This paper considers the following issues in relation to corporate insolvencies: (a) What is cross border insolvency? (b) Australia’s current legal framework for cross border insolvency; and (c) UNCITRAL’s Model Law on Cross Border Insolvency and its adoption by other countries and its imminent adoption in Australia. 2. What is Cross Border Insolvency? A cross border insolvency arises when an insolvent entity has assets or debts in more than one State. The term also encompasses the following scenarios: • winding up foreign companies; • recovery of foreign assets; • examination of foreign residents; • access to documents and information which is overseas; • foreign creditors and priority conflicts; • recognition of foreign insolvency proceedings; • claims against local assets by a foreign insolvency administrator; • coordination of insolvency proceedings in different jurisdictions; and • concurrent insolvency administrations. In the modern world, with ever increasing globalisation, international trade and electronic communications and asset transfers, the cross border complexities and complications of insolvencies are becoming more widespread and are certainly no longer the reserve of the largest companies of the world economy with global reach. Companies in greater numbers than ever before of all sizes increasingly have assets and creditors in more than one jurisdiction creating potential cross border insolvency 1 situations. This international element can be daunting to practitioners and creditors alike and protracted and is an added dimension to any purely domestic insolvency. 3. Universal Versus Territorial Approach Over many years an international debate has occurred over whether an insolvency has universal application or whether its application is limited to the place of adjudication. Those competing theories are known as the universal and territorial theories of insolvency law. Out of that debate, the theory of modified universality has emerged. The universal approach would dictate that one insolvency administration is to be universally recognised by all other jurisdictions in which the insolvent entity has dealings. Accordingly, one insolvency administrator, universally recognised, collects in all of the assets and has total administrative responsibility for the insolvency. Foreign creditors submit to the insolvency laws of that one insolvency administration and accept the result of that submission. A modification to that universal approach applies where there are concurrent insolvency proceedings. The proceedings in the place of incorporation are normally acknowledged as the principal or primary proceedings and the other proceedings are treated as secondary or ancillary proceedings. The insolvency administrator in charge of the primary proceedings will be responsible for realising all of the assets of the company worldwide and the insolvency administrator of the ancillary proceedings will be obliged to concentrate on getting in and realising local assets and remitting the fund to the insolvency administrator of the primary proceedings.1 On the other hand, the territorial approach involves each country employing its own insolvency laws to grab local assets and administer them locally according to the procedures and priorities of that country’s laws. Under the strict territorial approach, there is no recognition of foreign proceedings and a separate insolvency administration is required in each country in which the insolvent entity operates. 2 The major disadvantages of a territorial approach include the following: • Reorganisation of an enterprise is difficult or impossible because each unco-ordinated local proceeding focuses on maximising returns for local creditors rather than the total pool of creditors. • Even in a liquidation, realisations of greater value can be achieved if national borders are ignored. For example, a division of a company may have manufacturing and distribution facilities in several countries with each division being saleable for a higher price as a unit than would be received for each bundle of assets in each State. Nevertheless, existing laws make it very difficult to sell assets in multinational packages. • Although virtually all national insolvency laws endorse the principle of equality of distribution to creditors, territorialism produces highly unequal results. Aside from differing priority rules in each country, the distributions vary greatly depending on the assets sizeable in each country at the time of commencement of the external administration. Local creditors benefit where they are lucky enough to have more assets in their country at that moment and suffer where their jurisdiction is less fortunate. A very few sophisticated international creditors may collect in several proceedings and do very well, but most smaller creditors cannot play that game. The results are arbitrary and inconsistent with the principles of virtually every country’s laws. Above all, they are unpredictable, creating substantially increased transaction costs in international financing. • Shrewd debtors can exploit modern technology and the globalisation of commerce to move assets rapidly from one jurisdiction to another and to transfer assets to insiders or preferred creditors in other countries. Because recognition of foreign insolvency proceedings and co-operation with those proceedings is so cumbersome in most countries, it is very hard for administrators or liquidators to pursue and capture the assets. • Although overt discrimination against foreign creditors is relatively rare, they often receive little or no real notice of insolvency proceedings and too often suffer de facto discrimination in those proceedings. 3 4. Australia’s Current Statutory Provisions and Common Law Principles relevant to Cross Border Insolvencies At the time of writing Australia is yet to follow through on its promise to adopt the UNCITRAL Model law.2 Nonetheless, with a few exceptions3, its statutory provisions and common law principles position it toward the internationalist or universal end of the spectrum (as described more fully in Sections 5, 6 and 7 below), although there are occasional Australian cases which demonstrate a level of co-operation which is less than an internationalist might hope for.4 5. Foreign Companies Carrying on Business in Australia Section 601CD(1) of the Corporations Act 2001 (Cth) (the Act) prohibits a foreign company from carrying on business in Australia unless it is registered under Part 5B.2 Division 2 of the Act. A foreign company is defined as a body corporate incorporated outside Australia. The phrase carrying on business is defined in ss18 to 21 of the Act. Section 21(1) provides that a body corporate that has a place of business in Australia carries on business in Australia. The establishment or use of a share registration office in Australia or a dealing with property situated in Australia as an agent, legal personal representative or trustee, whether by employees or agents or otherwise will also constitute the carrying on of business in Australia pursuant to s21(2). A number of exceptions are contained in s21(3). A body corporate does not carry on business in Australia merely because it: (a) is a party to proceedings or settles proceedings or a claim or dispute; (b) holds meetings of its directors or shareholders; (c) maintains a bank account; (d) effects a sale through an independent contractor; (e) elicits or procures an order that becomes a binding contract only if the order is accepted outside Australia; (f) creates evidence of a debt or creates a charge on property; 4 (g) secures or collects any of its debts or enforces securities relating to such debts; (h) conducts an isolated transaction that is completed within 31 days, not being one of a number of similar transactions repeated from time to time; or (i) invests any of its funds or holds any property. A foreign company may apply for registration under s601CE of the Act. If it does so, the foreign company must appoint a natural person or a company resident in Australia as a local agent. A local agent of a registered foreign company is answerable for the doing of all acts that the foreign company is required to do under the Act and is personally liable for a penalty imposed on the foreign company for a contravention of the Act. Under s601CK(1) a registered foreign company is required, at least every calendar year, to lodge a copy of its latest balance sheet, cash flow statement and profit and loss statement. In view of those obligations, an alternative for a foreign company seeking to carry on business in Australia is to incorporate an Australian company as a wholly owned subsidiary of the foreign company. Where a foreign company carries on business in Australia but is not registered under Part 5B.2 Division 2, it commits a breach of s601CD(1) but that fact does not mean that Australian courts do not have jurisdiction in respect of that company for insolvency purposes. A foreign company owes its existence to its incorporation in a foreign state under a foreign law (not registration as a foreign company in Australia under s601CE of the Act). It therefore exists and proceedings can be commenced against it in the Australian courts notwithstanding that a foreign company is not a registered foreign company in Australia (see Feng v GMS Fulfilment Services Limited [2004] NSWSC 855 and McIntrye v Eastern